Colorado Is a Big Win for PDC

In an 11th-hour deal crafted by Governor John Hickenlooper, Rep. Jared Polis (D-Colo.) agreed Monday afternoon to pull his support for two ballot initiatives that would have restricted hydraulic fracturing.

Initiative 89 was an amorphous, useless environmental ballot item, but Initiative 88 was a very real threat to drilling as it raised the required setback (the distance from the nearest house to a well) to 2,000 feet from 500 feet. That would be a massive change and PDC Energy (PDCE) CEO-to-Be Bart Brookman told us at the Global Hunter conference in June that as many as 60% of PDC's planned wells in Colorado could have been affected by this measure. Brookman noted that the more likely outcome would be going house to house (farm to farm, mostly) and obtaining waivers from each individual property owner to the setback requirement. This would be a costly process and one that Brookman noted would cause PDC to reconsider its capital allocation.

Also, on his company's conference call, Noble Energy (NBL) CEO Charles Davidson noted that the quadrupling of the setback is really a 16-fold increase in acreage affected, since the 2,000 foot rule applied in all directions. It would have strongly hampered Colorado's future energy production.

As part of the compromise, a task force will be commissioned to judge local impacts of fracing, but that is a face-saving whitewash. This is a complete defeat for Polis and the extreme left wing of his party. With Republican Cory Gardner polling very strongly against incumbent Mark Udall in Colorado's Senate race, this compromise is the Democrats' last-ditch effort to retain control of the Senate this fall. We'll see.

This is a victory for progress and energy independence. Polis' initiative had nothing to do with the safety and efficacy of fracing and everything to do with not-in-my-backyard politics, which reportedly included a well that was basically in his back yard.

I have been buying PDC Energy for some clients, but have been selective on layering it in. Of course I am kicking myself for not buying more, but a 12.3% move (as PDCE made Monday) will do that. It's back to where I bought it for my Mad Money portfolio accounts in April and with the company's announcement last week that it is selling its share of the PDCM Marcellus joint venture for $250 million, you are looking at a focused company with two great plays: the Niobrara/Wattenberg in Colorado and the Utica in Ohio.

Larger competitors Noble Energy and Anadarko Petroleum (APC) both jumped about 5% after the news was reported.

Political pressures are the largest threat to unconventional drilling. The biggest risk facing PDCE was not lower nat gas prices (which have hurt the sector of late) but the political risk.